Crypto traders are divided over the impact of upcoming Fed rate hikes on Bitcoin

The US Federal Reserve (Fed) is likely to raise benchmark borrowing costs by 75 basis points (0.75%) on Wednesday in a continued bid to drain liquidity to curb inflation. Crypto traders are divided on how bitcoin (BTC) would react to rising rates.

Griffin Ardern, volatility trader at cryptocurrency asset management firm Blofin, predicts a fall in the bitcoin price after the Fed raised interest rates 75 basis points (bps) to the 2.25% to 2.5% window.

“Given that the overall risk level of the cryptocurrency market has not returned to a reasonable level, it is very likely that the price of BTC will fall by more than 10% after the Fed rate hike,” Ardern said.

The Fed’s liquidity-sucking measures, such as interest rate hikes and balance sheet unwinding, have rattled asset markets in recent months. Bitcoin has fallen more than 50% since the central bank launched the tightening cycle in March.

“Bitcoin and the broader cryptocurrency market could see another rally after the 75bps rate hike, after which we expect markets to trade sideways, while ether (ETH) may outperform the merger prediction,” according to Dick Lo, founder and managing director. from the quantitative trading firm TDX Strategy.

Perhaps both traditional and crypto markets have priced in the impending 75 basis point hike, with Fed officials hinting at such a move in recent weeks.

Bitcoin fell 7% in the week leading up to Wednesday’s Fed event. “We see participants taking a risk-off approach ahead of the FOMC decision as expected,” Lo replied when asked about pre-Fed flows in the cryptocurrency market.

At press time, federal funds futures, derivatives based on the benchmark interest rate, priced the probability of a move from 75 basis points at 75%, along with a 25% probability of a 100 basis point increase.

Trader and analyst Alex Kruger said the cryptocurrency market could see a slight recovery after a 75 basis point rate hike, but warned of a fall if the central bank surprises with a 100 basis point move. However, Fed officials had pushed back a full percentage point hike earlier this month.

In addition to interest rate increases

The focus will be on policymakers’ concerns about the risk of unemployment and the impending recession in Europe.

The market has convinced itself that inflation has peaked and the Fed will opt for slower rate hikes after July, possibly cutting rates next year. This appears to be evident from the 28 basis point drop in the 10-year Treasury yield over the past seven days. At press time the yield was almost 2.8%.

Risky assets like bitcoin could rise if the Fed’s policy statement or Chairman Jerome Powell appears increasingly concerned about recession risks, bolstering market expectations for a policy pivot (from tightening easing) in 2023.

However, observers expect the Fed to maintain its focus on controlling inflation while downplaying recession fears.

“There’s no question that Powell will pivot, but the pivot won’t be this year, at least until November, and there won’t be a significant reduction in rate hikes (like 25 basis points). The reason is that the Biden administration needs for the Fed to join them in expressing its determination and confidence in fighting inflation to win the November midterm elections,” Ardern de Blofin told CoinDesk.

According to Jon Turek, author of the Cheap Convexity blog, the Fed should stick to the June scenario.

“We are in this state of timing inconsistency where the Fed reacts to June CPI and the market trades on the European recession. The Fed will side with June CPI and I think more than the risk assets are suggesting right now,” Turek said in a Fed Insights published Tuesday.

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